Opinion Contributor

Growth in banking calls for strong global system

The urge to paint Cyprus as a unique case is misplaced, the author says. | AP Photo

By SALLY PAINTER | 6/12/13 9:28 PM EDT

When the epicenter of the ongoing eurozone crisis shifted to Cyprus in March, it was only the latest case of a globalized banking industry finding itself at the center of an international controversy.

Many commentators have pointed to Cyprus as an example of financial sector run amok, given that its banking industry was more than seven times the economy as a whole, employing 70 percent of Cypriots. The island’s overexposure to bad Greek assets spelled doom for the entire economy and pushed the country to the brink of exiting the euro, threatening the stability of the entire common currency.

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Yet the urge to paint Cyprus as a unique case is misplaced. According to the European Commission, Cyprus had Europe’s fourth-largest banking sector by share of gross domestic product, behind Luxembourg, Ireland and Malta. On average, EU nations have financial sectors that are 3½ times the size of their GDP. These are not quite Cyprus levels, but they do demonstrate that the rapid growth of banking is not an isolated phenomenon.

Cyprus represents, rather, the new normal — the rise of sprawling, complex and profoundly interconnected financial sectors. There is good reason to believe that globalized banking is good for our prosperity, facilitating international trade and fomenting cross-border investment. But there also is a dark side. The unintended consequences of instantaneous global financial connectivity include a number of security challenges, from the potential for money laundering and terrorist financing to cyberattacks that threaten the integrity of our bank accounts and the privacy of our personal information.

Nor is this only a problem of far-flung island jurisdictions or tropical tax havens. Recent history has revealed how uncomfortably close to home these problems really are. A growing list of major U.S. and U.K. institutions — including Wachovia, HSBC and most recently Standard Chartered — have been scrutinized by regulators and fined for their alleged involvement in the laundering of significant sums of money, including funds from Mexican cartels and sanction-busting Iranian banks. Martin Woods, the compliance officer that uncovered Wachovia’s problematic relationship with the cartel-dominated casas de cambio in Mexico, says the real challenge is “[n]ot the Cayman Islands, not the Isle of Man or Jersey. The big laundering is right through the city of London and Wall Street.”

The infiltration of organized crime or terrorist groups into our financial systems presents such a conundrum precisely because it is tied up in an otherwise positive trend — the growth and integration of emerging markets into the broader global economy. Mexico, for instance, is the third-largest trading partner of the U.S., and it receives more than $20 billion in remittances yearly.

Banks understandably are eager to facilitate these impressive capital flows, most of which are legitimate — but which, in high-risk jurisdictions, also blur together with illicit funds in often convoluted ways. The same goes for financial markets in Africa, where drug money is funneled through existing businesses — in one case, through used cars from the U.S. sold in Benin and Gambia — and from there transferred to dollar-denominated accounts in Europe and the Middle East.